Energy Summary for Nov. 22, 2021
2021-11-22 20:01 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for January delivery added 65 cents to $76.75 on the New York Merc, while Brent for January added 81 cents to $79.70 (all figures in this para U.S.). Western Canadian Select traded at a discount of $19.45 to WTI, down from a discount of $19.19. Natural gas for December lost 28 cents to $4.79. The TSX energy index added 1.36 points to close at 161.29.
Oil prices dropped to a seven-week low in early trading this morning, on rumours that the governments of the United States, Japan and India are all looking into releasing national oil reserves. Then prices rebounded over the rest of the day, on rumours that OPEC+ would respond to any such releases by clawing back its own supplies. "OPEC is sending a signal that if [the governments] do this, they have some barrels they can withhold and will offset the impact of a release," Phil Flynn, senior analyst at the Chicago-based Price Futures, told Reuters. None of the rumours have been verified. On the demand side, prices remained under pressure from renewed European lockdowns. Austria entered its fourth lockdown today and Germany is considering fresh curbs as well.
Closer to home, Canadian consumers continue to grapple with record flooding in British Columbia. Notably, the Trans Mountain pipeline has been shut down since Nov. 14, the longest period without service in its seven-decade history. The B.C. government issued an emergency order on Friday to restrict gasoline purchases in storm-stricken parts of the province. The company behind the Trans Mountain pipeline, which said it shut the line down as a precaution and has found no evidence of spills, is optimistic that it can restore some level of service before the 10-day emergency order expires. In a statement on its website today, Trans Mountain said crew members are "working around the clock," with the goal of resuming service "in some capacity" by the end of the week.
Deal flow continued unimpeded. Brian Lavergne's B.C. Montney-focused Storm Resources Ltd. (SRX), unchanged at $6.29 on 879,400 shares, has scheduled the special shareholder meeting for its proposed takeover by Canadian Natural Resources Ltd. (CNQ), up 70 cents to $51.76 on 11.7 million shares. Storm will ask shareholders to vote on the $6.28-a-share all-cash offer on Dec. 15.
Storm is taking a carrot-and-stick approach to selling shareholders on the deal. The original press release on Nov. 10 was all carrot, with Storm swooning over the "attractive value" and "all-time-high share price." The stick came out in the newly filed information circular, with Storm fretting about "future uncertainties associated with operating in British Columbia" if the takeover were to collapse. These uncertainties include a recent B.C. Supreme Court ruling on treaty obligations (which Storm discussed on July 5), a continuing review of the provincial oil and gas royalty system (which the province has dubbed "broken"), and general concerns about future taxes and the "unknown ability to materially grow [its] asset base." None of that seems to faze Canadian Natural. Storm, which revealed in the circular that it quietly hung out the for-sale sign in August (not long after its rather panicked announcement on July 5), is urging investors to vote yes at the meeting.
On the Alberta side of the Montney, the Riverstone-backed Pipestone Energy Corp. (PIPE) added six cents to $3.56 on 507,100 shares. Pipestone announced this morning that it plans to buy back up to 9.5 million of its 191 million shares over the next year. It offered the usual explanation, namely the belief that "at times, the prevailing share price may not reflect the underlying value of the common shares."
Pipestone did not need to say that the prevailing mood in the market is that energy companies with free cash flow should be using that cash to please shareholders, with buybacks, regular dividends, special dividends and anything else that comes to mind. Buybacks are the lowest-pressure option as they cost nothing to announce and are easy to ignore if other opportunities look more tempting. Pipestone, for its part, already announced a couple of weeks ago that its "first-priority use" for its cash is debt reduction. A busy drill program has sent its net debt up to $219-million as of Sept. 30 from $170-million at the start of the year.
Further afield, Jose Francisco Arata's New Stratus Energy Inc. (NSE) lost 16 cents to 56 cents on 584,700 shares. It resumed trading this morning and finally gave investors a chance to react to last Thursday's announcement about its expansion into Ecuador. New Stratus has been trying to find a way into this country for more than a year. It has finally succeeded, but the price it paid for this success is unclear.
By way of background, New Stratus first announced an Ecuadorean deal in October, 2020. It wanted to acquire a 35-per-cent interest in the Repsol-backed consortium that operates blocks 16 and 67, located in Ecuador's Amazon. The blocks are producing about 15,600 gross barrels of oil a day (after peaking at around 75,000 barrels a day in 2006 and 2007). New Stratus would also have received a 29.7-per-cent interest in the owner of the OCP pipeline, one of the largest pipelines in the country. As consideration, New Stratus agreed to pay $5-million (U.S.) upfront, plus $12-million (U.S.) -- maybe less, maybe a lot more -- in conditional payments. That was the plan when it announced the deal in October. The Ecuadorean government said no and scuttled the deal 10 days later. New Stratus has been trying ever since to restructure the terms and coax out a yes.
It has finally won the government over. Last Thursday, New Stratus triumphantly announced that the government had approved the transfer of the indirect 35-per-cent interest in the blocks. Yet there were some notable differences and omissions in this press release compared with last year's. For example, there was no mention of the pipeline (with the company later confirming to local media that the deal does not include the pipeline anymore). Moreover, there was no mention of any price tag. The only dollar sign in the new update was New Stratus's previously unstated proposal to spend a grand total of $200-million (U.S.) on the blocks over the next two years. It does not have the cash flow for that and will need to find lenders. Another issue to sort out (and another omission from the date) is the fact that the blocks' contracts are set to expire at the end of next year.
New Stratus promised to provide more details when the deal closes next month. In the meantime, Mr. Arata, the company's chairman and chief executive officer, made the local media rounds over the weekend. He told El Comercio that New Stratus expects to be able to extract 115 million barrels of oil from the blocks over the next 15 years, adding $1.8-billion (U.S.) to Ecuador's economy. To Primicias, Mr. Arata added that New Stratus expects to start negotiations next month to extend the blocks' contracts by 15 to 20 years. He noted that New Stratus has high hopes for Ecuador and is scouting for more assets to buy.
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